NYT on the IMF

[Michael Perelman <michael@xxxxxxxxxxxxxxxxx>]

A Study Says I.M.F.'s Hand Often Heavy

By JOSEPH KAHN

ASHINGTON, Oct. 20 ? The photo captured what
Kipling might have called the financial man's
burden: Michel Camdessus, head of the
International Monetary Fund, towered over
President Suharto of Indonesia as Mr. Suharto
agreed to terms for rescuing his nation from
economic oblivion.

That Indonesian bailout, and several others
like it around the world during the emerging-
market financial crisis of the late 1990's,
was often criticized as the International
Monetary Fund's equivalent of imperial
overstretch. Now, a new study using the
fund's own unpublished data suggests that the
critique may have actually underestimated the
fund's commandeering approach.

Under heavy pressure from wealthy nations
that control its policies, the fund demanded
a king's ransom from Indonesia as the price
for its $40 billion assistance package.
Indonesia was told to raise taxes on state-
owned companies; cancel 12 road, bridge and
port projects; remove protections on dairy
farmers; and eliminate price controls on
cement ? part of a long list that at one
point included 140 items, the study shows.

The idea was to convert Mr. Suharto's
Indonesia, which had a partly capitalist
economy plagued by corruption, into an open,
competitive and stable free market economy.
Even though few mainstream economists argue
with the goal, the methods are coming under
new scrutiny.

"I think it's clear that both the scope and
the depth of the fund's conditions were
excessive," said Morris Goldstein, a 25- year
I.M.F. veteran who did the study. Mr.
Goldstein, who is now an economist at the
Institute for International Economics, has
often defended the I.M.F. as an important
force for global financial stability. But he
said that the recent push for radical
overhauls of nations that borrow money has
undermined the fund's reputation and strained
its competence.

"They clearly strayed outside their area of
expertise," Mr. Goldstein said. "If a nation
is so plagued with problems that it needs to
make 140 changes before it can borrow, then
maybe the fund should not lend."

The dispute is a technical one, but with far-
reaching implications. In the last decade,
the fund, not always willingly, became the
primary vehicle for rich nations to export
capitalism to developing countries, including
heavyweights like Russia and Brazil, as well
as the former Communist states of Eastern
Europe and poverty- stricken nations in
Africa.

As its mission has expanded, its track record
has not always kept pace. Some nations that
received I.M.F. aid during the financial
crisis have recovered quickly. But Russia and
Indonesia are examples of high-profile
lending efforts sodden with detailed
instructions that have not, to date, led to
sustained economic growth.

Lending programs often intrude on areas well
outside the I.M.F.'s traditional mandate, Mr.
Morris's study of its records suggests.
Thailand was told to remove a tax on
foreigners who buy condominiums. South Korea
was given a blueprint for tax reform. The
list of demands on Russia at one point topped
even Indonesia's, with the fund overseeing
200 changes in the way the Russian government
spent money, collected taxes, managed banks
and regulated the oil industry.

The fear is that the I.M.F. has been acting a
little like a heart surgeon who, in the
middle of an operation, decides to do some
work on the lungs and kidneys, too. The fund
has used financial emergencies, when
borrowers needed help urgently, to extract
the sort of concessions that nations are
often not willing to make in healthy times.

If the operations worked perfectly, few would
complain. But they often do not work
perfectly, Mr. Morris asserted, again citing
the fund's own data. Compliance with the
fund's lending conditions in Indonesia was a
negligible 20 percent, he estimated. The
I.M.F. has had little success raising growth
rates for its African clients.

Those statistics may underlie a rethinking of
the fund's approach by Horst Köhler, a former
German government official who was appointed
to head the I.M.F. after Mr. Camdessus
retired earlier this year. After Mr. Köhler
returned from visits to client nations last
summer, he pronounced his aversion to some of
the heavy demands made of borrowers. He said
that there will be "no more Indonesias."

Treasury Secretary Lawrence H. Summers has
also pushed the fund to streamline its
lending programs and focus more on what many
economists think of as its core mission ?
preventing financial crises from spreading.
Mr. Summers recently won support from other
board members at the fund to eliminate some
kinds of lending and shorten the length of
loans, changes that might wean the fund away
from long-term micromanagement.

But, as Mr. Goldstein pointed out, the
pressure to use the fund as a lever to bring
about changes in developing nations comes
primarily from the Group of 7 wealthy
nations, the United States foremost among
them.

The Treasury Department, which must satisfy
Congressional concerns that taxpayers' money
going to the I.M.F. is not squandered,
insists that the fund attach many conditions
to loans. It recently backed another one:
making the I.M.F. a global police officer to
fight money laundering.

Still, Mr. Morris's study, which is being
presented to a high-level meeting of
government officials and private economists
in Woodstock, Vt., this weekend, may reflect
a new consensus that the fund should do fewer
things, and do them better. Exactly which
things ? Is trade reform essential? Must a
nation fully open its capital markets to
foreign investors? ? is still up for grabs.

But the next time a leader of a nation
getting I.M.F. aid affixes his signature to a
lengthy contract for change, it seems
unlikely that Mr. Köhler will be captured on
camera hovering behind him.


--
Michael Perelman
Economics Department
California State University
Chico, CA 95929

Tel. 530-898-5321
E-Mail michael@xxxxxxxxxxxxxxxxx